Exploring All Options Means Better Solutions And More Sales

Tax-deferred plans like 401(k) and profit-sharing plans are great, but what can you do when your pre-retirement client is already contributing the maximum to his or her plan and makes too much money to be eligible for a Roth IRA, or is a business owner looking for additional solutions?

If you dont explore all the options available to pre-retirees, you could be missing opportunities to help them do better and thus lose sales.

Before doing pre-retirement tax and investment planning, try to set up your client with a long term care insurance policy from a rock-solid company. While it is difficult to persuade people in their 40s and 50s that they need LTCI, the decision is vital.

LTCI buys clients freedom from long term care costs. Once theyre covered, you can plan without having to set aside contingency funds to pay for a nursing home, home care or assisted living.

But many clients in their 40s and 50s wont consider LTCI right away. If your client wants to focus on investments first, dont fight it. Do that planning first, win the clients trust and then address LTCI afterwards.

Lets look at a real-life example. Jim is a successful 50-year-old homebuilder with 2 kids in elementary school. The sole owner of his company, he already makes maximum retirement-plan contributions and is ineligible for a Roth IRA.

Jim wants to retire at 60 and has some fears about outliving his money during retirement. He asked me to put together a plan to ensure that hell have plenty of income for himself and his family if he lives to age 90. Hes willing to take some investment risk but wants to nail down guaranteed income first. Jim was willing to buy LTCI at the start, and that helped simplify planning.

To create his investment plan, I assumed a 3% inflation rate during retirement and surmised that hell earn a minimum of 5% on his income investments during the next 10 years, coupled with the power of compounding. When Jim retires, hell be in a different situation than the accumulation phase hes in now. And hell need both growth and income from his retirement assets.

At retirement, well create “income ladders” composed of fixed-income investments, such as immediate annuities, bonds or CDs. These will provide safe, steady, dependable income hell need to replace his paychecks in retirement.

An individual who retires always has to balance immediate needs, which require liquid assets, with long-term retirement objectives, which require that some assets remain invested and continue to grow. As advisors, we have to be sensitive to this issue and remember the liquidity taxes when a client begins to receive money from investments, IRAs, 401(k)s and pension plans.

With this in mind, I recommended for Jim a 10-pay variable universal life policy. Like a Roth, VUL offers tax-free withdrawals (up to the basis) later on, but unlike a Roth, VUL is available to upper-income investors.

A VUL policy allows a policyholder to shelter more income than a Roth by overfunding the plan up to the limits of a modified endowment contract. Plus, theres the death benefit for his familys protection. Its one of the most flexible, potent financial instruments.

When I explained to Jim how the VUL policy would work, he was floored. The advantages were so compelling, he bought it right away.

I recommended a $1 million policy that has an $11,600 minimum annual premium. The policy will be paid in full by age 60, his projected retirement age. The biggest advantage is that the policy allows him to invest additional funds (up to $65,900 annually) without becoming an MEC, which negates the tax advantages. Assuming he overfunded the policy 8 out of 10 years, I projected a $1.8 million accumulation in 12 years.

Jim liked the flexibility VUL provides. If he has a bad year, he can skip overfunding and then just pay the annual premium. In good years, he can make up the shortfall from previous years.

Lets suppose 2004 is a bad year, and he pays the minimum premium. But 2005 is a great year, so he contributes $120,200 (two times $65,900 minus $11,600).

Now, lets fast-forward. If Jim dies before retirement, his family is protected with at least a $1 million death benefit that can grow once the cash value exceeds the threshold.

But under a happier scenario, Jim lives a long, full life in retirement. If he needs the money for extra income, he can take either loans or withdrawals from his policy tax-free.

Withdrawals are tax-free if they dont exceed the policys basis and loans are always tax-free. So, Jim can take money out to travel around the world or send his grandchildren to college or do whatever he likes.

But perhaps the income generated by his taxable investments and mandatory distributions from his retirement plan will be ample and Jim wont need to take any money out of the VUL. In that case, the death benefit and the cash accumulation inside the policy will continue to grow and his beneficiaries will get full proceeds when Jim passes away.

Jims plan illustrates an important principle: Dont put all your retirement eggs in one basket. Its important to diversify not only among asset classes but also among different vehicles to provide the greatest tax-advantaged benefit for the client while minimizing risk.

By expanding your horizons, youll not only do the best job for your clients, youll also do very well for yourself.

Wilma G. Anderson, a sales trainer serving agents, companies and MGAs, is known as The LTC Coach and is president of Senior Care Associates, Inc. in Littleton, Colo. Contact her at Wilma@theltccoach.com.


Reproduced from National Underwriter Edition, October 7, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.